Councils' investments plans have been dealt a blow as the Treasury announced a rate hike to the Public Works Loan Board (PWLB).

In a letter to chief finance officers yesterday, the Treasury hiked the interest rate charged on loans to local authorities by one percent, taking the interest rate from 1.8% to 2.8% with immediate effect.

The letter acknowledged freedom to borrow, supported by the PWLB, was ‘fundamental to supporting local capital strategies and authorities' organisational objectives, including regeneration, supporting local growth and service delivery'.

But it claimed the hike was a ‘restoration of normal PWLB lending rates' .

It comes amid increasing concerns over large investments being made by some authorities due to the availability of cheap finances. 

A Treasury spokesperson said: 'This one percentage point increase takes rates back to levels that were available in 2018. Even with this change, the PWLB rates offer very good value to local authorities.

'We have also legislated to increase the lending limit of the PWLB to £95bn, as part of the Government's commitment that local authorities can access financing to support their capital spending plans.'

The Chartered Institute of Public Finance and Accountancy's associate director, Andrew Burns, said the borrowing was ‘clearly to temper the levels of more speculative borrowing'.

He added: ‘CIPFA's Prudential Code has recently been reinforced to address this activity and is clear that authorities must not borrow more than or in advance of their needs purely in the interests of profit.

‘It requires councils to consider the risks implicit in dependence on commercial income, and the code advises that if commercial activity is undertaken purely to raise income an extra degree of governance and transparency is needed, with independent advice required to ensure transactions are sound.'

A spokesperson for the LGA said: 'This 1% PWLB rate increase could cost councils an extra £70m a year for borrowing to be undertaken in the next year.

'It presents a real risk that capital schemes, including vital council house building projects, will cease to be affordable and may have to be cancelled as a result.'

Finance spokesperson for the District Council's Network, Cllr Sharon Taylor, said: 'It is extremely disappointing that the Government is to increase Public Works Loan Board rates, at a time when councils' finances are already under huge pressures.

'From building homes to financial planning, this could seriously jeopardise councils' investment strategies.'

Regeneration company Be First called the decision 'dysfunctional' and warned it will hit public housing projects hard.

Managing director Pat Hayes said: 'It's a dysfunctional decision by the Johnson led Government - it looks like the left hand doesn't know what the right hand is doing.

'Boris Johnson promised to put ‘rocket boosters' under the economy to boost economic growth in preparation for Brexit. But the reality is that the Treasury is choking off funding for badly needed housing and public infrastructure projects.'